This paper contributes to the international policy debate on the effect of macroprudential policy
on housing-market dynamics. We use detailed New Zealand housing market data to evaluate the
effect of loan-to-value ratio (LVR) restrictions on house prices. The main challenge in
identifying these effects is that housing markets are affected by a range factors over and above
LVR policy. For example, New Zealand experienced a raft of policy changes and
macroeconomic shocks during the periods in which LVR policy changes were implemented.
Many of these shocks and policies are likely to have affected the housing market. For example,
when the first LVR policy was implemented, retail interest rates were rising alongside an
increasing expectation for monetary policy tightening, while the New Zealand Treasury was
adjusting housing-related policies at the time of the second LVR policy. This paper uses the
exemption for new builds from the LVR restrictions as a natural experiment to identify the effect
of LVR policy.

We find that, over the one year window around the new home exemption, the first LVR policy
(referred to as ‘LVR 1’) had a 3 percent moderating effect on house prices, and this moderating
effect is broadly similar across both Auckland and the rest of New Zealand. Interestingly, our
estimates show that LVR 2 (which tightened restrictions on Auckland properties and loosened
restrictions elsewhere) did not significantly stop Auckland house prices from rising. By contrast,
house prices in the rest of New Zealand (RONZ) increased by 3 percent due to the relative
loosening of the LVR restriction. In LVR 3, the RBNZ further tightened the LVR restrictions on
property investors nationwide. The moderating effect of LVR 3 was clearly seen in Auckland
with a 2.7 percent reduction in house prices. This LVR 3 effect is both statistically and
economically significant, as during the same period the average house price increased by 5.8
percent.

Overall, we estimate that the LVR policies reduced house price pressures by almost 50 percent.
However, the effect of LVR policy is highly non-linear. When it becomes binding, LVR policy
can be very effective in curbing housing prices.